In 2016, Venezuela’s Caracas Stock Exchange gained 114 per cent. This was while the country was facing political upheaval and economic setbacks which had seen inflation exceeding 1,000 per cent and mothers waiting for 13 hours in line to get baby formula.
The jump in the value of the shares did not reflect an increase in profitability, but merely of their asset value as people, hoping to avoid hyperinflation and scared to keep the local currency, rushed to buy assets making it more expensive.
Some stocks do quite well during periods of hyperinflation, according to a number of economic experts who note that stock values and inflation move together. Zimbabwe’s stock market soared during its hyperinflation in 2008. An October 2008 Business Weekly article stated that investors in Zimbabwe believed the stock market was the only place to get a return on their money.
Because of high inflation, nominal GDP goes up exponentially, which leads to increases in market capitalisation but not enough to keep up with nominal GDP growth. The result is that stocks move upwards but market capitalisation as a percentage of nominal GDP goes down.
Market capitalisation in Zimbabwe dropped from 40 per cent of GDP in 2002 to five per cent in 2008. The percentage improved to 15 per cent as the market conditions improved.
In Egypt, the EGX30 index had gone up by 76 per cent by the end of 2016 which saw market capitalisation reaching LE600 billion, compared to LE429 billion in December 2015.
How do such historical records compare to GDP? In 2007, total market capitalisation in Egypt’s Stock Exchange was over 100 per cent of GDP, but it went down to around 17 per cent in 2015. In 2016, with the increase in inflation GDP mounted to LE2.74 trillion, making the percentage equivalent to 22 per cent of GDP.
Looking at nominal GDP between 2005, when the Egyptian stock market started to be considered as an emerging market, and today, we find that between 2005 and 2011 annual nominal GDP growth was in the range of 10 to 12 per cent, with the exception of 2007-2008 because of a government stimulus package.
Nominal GDP at the beginning of 2011 was around LE1 trillion, and in 2015-2016 the announced nominal GDP was around LE2.74 trillion, meaning an annual growth rate exceeding 30 per cent. Meanwhile, the expected nominal GDP in 2016-2017 is around LE3.4 trillion, marking a growth rate of 24 per cent over the previous year.
For a stock market investor, what matters most is the ratio of market capitalisation compared to nominal GDP. After 2011, the ratio was in the range of 20 to 22 per cent of GDP.
So if nominal GDP in 2016-2017 reached LE3.4 trillion, the market capitalisation should be in the range of LE680 to LE748 billion with the ratio ranging between 20 and 22 per cent of GDP. This represents between 10 and 20 per cent growth in market capitalisation and translates into an EGX30 index ranging between 13,200 and 14,700 points.
Keeping the same 22 per cent growth rate in terms of the value of GDP, in 2017-2018 this should reach LE4.1 trillion, with the 20 per cent valuation of GDP being equivalent to a market capitalisation of LE830 billion and pushing the index up to reach 16,500 points owing to high inflation and high growth in nominal GDP.
If the Egyptian government reform package manages in 2018 to increase the ratio of market capitalisation to GDP to 38 per cent, its level in 2010, we should see an EGX30 index exceeding 24,000 points despite the high inflation and the increase in nominal GDP.
The writer is an investment consultant.